USD: The dollar remains vulnerable

MUFG Bank Analysts they point out that the Federal Reserve’s “transitory” inflation message has credibility. They see that the risk of a steeper jump in yields is greater, the outlook remains low for now. His outlook for the dollar remains bearish, although with less conviction than before.

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“Communicating on the Fed’s guidance has gotten a bit more difficult after this week’s CPI release, but the initial view is that the Fed has done a good job convincing the market of its long-standing vision. that the coming inflation will be transitory. But of course that guidance is only powerful if it’s credible and there are a number of factors that have helped provide that credibility, which is evident in post-CPI market movements. “

“While the limited movement in 10-year yields is notable, there have also been similarly modest movements at the short end of the yield curve. This is important in terms of the exchange rate, as the short part of the curve could prove to be a greater differentiating factor later on. Most central banks will come down this year and some could go up this year and next, but for the euro zone and Japan, a real rate hike could still be a bit far off. “

“Since the US dollar is the global reserve currency, the US Treasury market remains a key market for global investors and with hedging costs still so low due to the short end of the US curve. .US is well anchored, the rebound in hedge net yield is becoming more attractive. “

“While we believe that US yields will rise, the above factors should mean that the moves are orderly and therefore consistent with the weakening of the US dollar.”